Tuesday, February 17, 2009

There was a lot of red arrows pointing down in my accounts today. Fear was palpable in the market with a stampede toward gold, treasuries and the dollar with every other asset class being driven down in value. As pointed out in a recent Barron's article, some holes are forming in the basic tenets of modern portfolio theory. Modern Portfolio Theory Ages Badly - Barrons.com

The market is saying two things to me. There is no confidence that our banks are solvent and a recovery is unlikely to start before the 4th quarter of 2009, if we are lucky.

The S & P 500 closed at 789.17 today. The Dow suffered a late swoon, falling 297 points to 7552.60. So an optimist could say that this is above its previous closing low on 11/20/2008 at 7552.29. There was a big rally on the 21st of November for the super optimists. U.S. markets venture into sky-is-falling territory - MarketWatch

With the close today at below 815 in the S & P 500, my trading model prohibits me from buying any common stock until there is a monthly close above 815, unless I am buying a stock using no more than the proceeds from another common stock sale. This is not likely to happen given that virtually everything is so depressed. So, I can no longer invest cash flow from dividends or interest payments by buying a common stock until there is a monthly close above 815. This is a capital preservation rule developed last year and has no impact on bond or even preferred stock purchases. Under my VIX model developed in 2007, I would ordinarily be prohibited from even investing cash flow into common stocks during an elevated and unstable VIX pattern as outlined and explained in many prior posts, until the VIX fell below 20 and stayed below 20 for 3 months. I made an exception to that model which permitted cash flow investment into common stock purchases which then required me to create another rule that demolished the exception which is the 815 exception to the exception so to speak. On this suspension of buying, I am going to keep a running tally of the cash flow so I will know exactly how much that I will have to invest when and if the S & P closes a month at above 815. The origin of the exception to the exception is discussed in prior posts.

This news story falls under the category "you must be kidding." A doctor, Dr. VisuvalingamVilvarajah, who plead guilty to murdering two people by shooting them in the head, was sentenced to 20 years for the double murder and was paroled after serving only five years. The medical board gave him his medical license back soon after his parole. Killer doctor's drug case gives hope to victims' family | www.tennessean.com | The Tennessean Both of those statements that I just made are simply beyond my comprehension. You would think the lives of two people are worth more than 5 years in prison, and that a double murder would at least lead to a lifetime loss of a medical license. The doctor has now been charged with a drug offense in Kentucky related to his prescription writing practices. If convicted, he could serve more time on the recent charges than for murdering two people.

I made some adjustments in my bond portfolio today. I sold my position in the bond ETF LQD at 99.05 which was bought in November 2008 at 90 and change for about a 10% gain with dividends. The current yield is over 5% but I am now seeing other opportunities developing in the bond market that will give me more bang for the buck, without losing investment grade quality.

With the stampede to treasuries today, this knocked down the prices of both PST and TBT, the double shorts for the treasuries. I already own TBT so I started a position today in PST by buying 30 shares at 53.87. This is not an investment or a bet. It is a hedge for my bond portfolio. PST is the double short for the 7 to 10 year treasuries and it is a Proshares product. Ishares is the sponsor for a long ETF for 7 to 10 year treasuries that many are buying today. IEF: Summary for ISHARES BARCLAYS 7-1 - Yahoo! Finance

The ten year treasury is currently yielding about 2.64% according to the WSJ market data page. What I intend to do is buy more investment grade corporate bonds with a much higher yield than the comparable treasuries and hedge the inflation risk, in part, by buying the double short etfs for the treasuries. I started along that road last quarter. I have gone into my reasoning for this approach in more detail in other posts. I prefer using TBT for this purpose but the price has gone up 20% since my last purchase.

I am cognizant of the carnage visited on the Aegon equity preferred issues today. I am still trying to assess whether one of them is even worth the risk of an add at this point. I saw one approaching a 20% yield late today.

DISCLAIMER:

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.